Drill, Baby, Drill

With Trump up and running, his blizzard of Executive Orders has begun.

Key Points:

·     One of President Trump’s stated aims is to significantly increase US oil production, with cuts in taxes and regulations seen as an incentive to drive production higher.

·     But US shale producers are not motived by production growth, their CEOs are more focused on capital discipline, cash generation, returns on capital and, ultimately, share prices.

·     They are more likely to pocket the benefits from the new paradigm and drive financial returns higher, than increase overall production.

·     And even if they wanted to, geology and practicalities will prevent them, because it really is twilight in the Permian. When looking at US oil supply, it’s important to include Natural Gas Liquids (NGL), the near oil by-products from shale gas. Too many oil bulls ignore this vital source of oil supply growth.

·     If you include NGL, US output growth is still falling sharply.  Six months ago, the US was adding 1.6m bbl/day to global supply.  Now it’s just 400,000 and likely to turn negative at some point this year.

·     Meanwhile, Iranian supply is likely to face tougher sanctions, and Russian supply, which was already falling sharply, has finally been hit by effective US sanctions now.

·     Trump may want U$60/bbl oil, but OPEC wants something nearer U$90/bbl and trends in US production and geopolitics may well see them get their way.